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Will Interest Rate Freeze Save Mortgage?

The Wall Street Journal reported today that the Bush administration and major banks and mortgage lenders are close to a working out a plan that would freeze mortgage rates on select subprime loans.

The plan is being negotiated between the Treasury Department and a slew of banks, including Citigroup, Countrywide Financial, Wells Fargo, and Washington Mutual.

Details of the plan, which are still being worked out, are set to be released as early as next week, and will likely extend introductory rates on a number of home loans for borrowers who are unable to make the higher monthly mortgage payment.

The coalition includes mortgage servicers, mortgage counselors, and investors, who are working to create standard criteria to determine who would be eligible for an interest rate freeze, and for how long.

The Journal reported that one possible scenario would freeze rates for up to seven years.

The move comes as more than two million adjustable-rate mortgages are poised to reset, which the Treasury fears could lead to higher default rates.

According to recent data from First American LoanPerformance, roughly 6.6% of subprime loans were in foreclosure as of August.

The plan to freeze teaser rates and other low introductory-rates could stem that problem, hopefully long enough for the housing market to get back on track.

Shares of related companies jumped on the news, with Citigroup up $1.25, or 3.87%, Countrywide rising $1.53, or 16.45%, WaMu up $1.39, 7.72%, and Wells Fargo climbing over $2, or 6.68%.

Countrywide also received an analyst upgrade from the same firm who cut their rating about a week ago.

“We believe this is good news for our sector as a whole, but believe that Countrywide will be prime beneficiary as the nation’s largest servicer and top originator,” analysts at Fox-Pitt, Kelton wrote in a research report Friday.

Government financiers also benefited from the news, with Freddie Mac gaining a whopping $4.39, or 14.88%, and sister Fannie Mae climbing $4.90, or 15.13%.

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